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CA Intermediate · Advanced Accounting · AS 9 Revenue Recognition

Vikas Infotech Ltd licenses software to Gupta & Co. for five years, charging a royalty of 4% of Gupta & Co.'s annual sales as per the agreement. Gupta & Co.'s sales for FY 2025-26 were Rs 2,50,00,000, and the royalty is collectible. How should Vikas Infotech recognise royalty revenue for the year?

Vikas Infotech should recognise Rs 10,00,000. AS 9 requires royalties to be recognised on an accrual basis in accordance with the substance of the agreement, so the 4% rate applied to the year's sales of Rs 2,50,00,000 gives the revenue for FY 2025-26.

  1. ARs 10,00,000 on accrual basis per the terms of the agreementCorrect
  2. BRs 2,00,000, spreading equally over the five-year term
  3. CRs 50,00,000 upfront on signing the agreement
  4. DNil, until the five-year term is complete

Explanation

AS 9 states that royalties accrue in accordance with the terms of the relevant agreement and are usually recognised on that basis. Royalty = 4% x 2,50,00,000 = Rs 10,00,000. Spreading equally ignores the sales-linked terms, and the other options have no basis in the agreement.

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